Business Model Generation

The Emperors New Clothes?

A review of Osterwalders &
Pigneurs Business Model
Generation approach and its
potential for improving business
development
Whitepaper from TBK Consult
Author
Hans Peter Bech
Second edition
Hans Peter Bech 2013
Second edition
Unless otherwise indicated, all materials on these pages are copyrighted by Hans Peter Bech. All
rights reserved. No part of these pages, either text or image may be used for any purpose other than
personal use. Therefore, reproduction, modifcation, storage in a retrieval system or retransmission,
in any form or by any means, electronic, mechanical or otherwise, for reasons other than personal
use, is strictly prohibited without prior written permission.
First published by TBK Consult in 2013 in electronic format only:
TBK Consult Holding ApS
Strandvejen 724
2930 Klampenborg
Denmark
CVR: DK31935741
978-87-93116-02-3
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Table of contents:
Rapid Propagation 5
A well thought out business model for the Business Model 5
A picture tells more than a 1.000 words 5
It is about you rst and about the model second 6
Cartoon Format 7
Graphic Facilitation 8
An App for the iPad 8
The Business Model Front Ofce 8
Market Segments and the Value Propositions 8
Channels 9
The software industry channel denition 9
The value chain 9
The Channels and the Business Model 10
The Business Model Back Ofce 10
The Business Model Environment 11
Separating the controllable from the uncontrollable 11
The Business Model Environment in the future 11
Mitigate and exploit 12
The Four Business Model Environment Forces" 12
Key Trends 13
Market Forces 13
Industry Forces 14
Macro Economic Forces 15
Managing the business model environment 15
How do they make money? 16
Is Business Model Generation the Emperors new clothes? 17
Reality Distortion Field 17
The quick x and the low hanging fruit 17
Business Model Generation is not a shortcut 18
Prototyping 18
The water may look at, but.... 18
Not a one night stand 19
Management Consultants and Business Model Generation 20
Involvement 20
Our conclusion 21
About the Author 22
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The target audience for this whitepaper is the board of directors,
the CEO and other executives of software driven companies with
ambitions for achieving global market dominance.
The whitepaper is applicable for all types of value chains
1
.
The whitepaper discusses the application of the Business Model
Generation framework, the use of the 9 building blocks on the
Business Model Canvas and the Business Model Environment
analysis.
The whitepaper argues that the approach is not a quick path to
success, it is not a way to achieve fast and monstrous results by
doing very little and it is not an approach to harvest the so called
low hanging fruit.
Contradictory to common perception, Business Model Generation
facilitates a comprehensive, structured and on-going process of
gradually improving the business setup, which delivers steadily
increasing value to customers, attractive proft for the owners
and remains tough to copy by competitors. Business Model
Generation combines the narrative description of a business with
the associated P&L
2
simulation of the revenue and cost streams
creating a blue print, which can be tested against reality and
implemented when proven valid.
Business Model Generation is not a one-time effort. A start-up
will return to the business model blue print weekly. The company
in Go-Go
3
will check monthly, the company in Adolescence will
check quarterly and the enterprise in Prime will check twice a
year.
Hans Peter Bech
Design and lay-out: Flier Disainistuudio, Tallinn, Estonia,
www.fier.ee
Proof reading: Emma Crabtree, TBK Consult
1
See http://tbkconsultblog.com/2013/02/12/partner-pl-the-way-to-
make-partners-in-the-software-industry-productive/
2
P&L: Proft & Loss
3
See http://www.adizes.com for defnitions of Go-Go, Adolescence and
Prime
Targeted audience
Abstract
Author
Acknowledgements
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Alexander Osterwalder and Yves Pigneur published the book
Business Model Generation in 2010. The book is primarily based
on Osterwalders research (Ph.D. dissertation).
In the span of just a few years
the Business Model Canvas and
the formats used by Alexander
Osterwalder and Yves Pigneur
have spread like wildfre all over
the world.
Alexander Osterwalder and Yves Pigneur didnt invent the
concept of the business model.
They provided a precise and consistent defnition and made the
concept comprehensible, operational and accepted.
The business model used to launch the book and its concepts
were well thought out. Inspiration had been drawn from the open
source communities and the promise of graphical facilitation
1
.
In June 2009 Osterwalder organized an event in Amsterdam
(NL) to share knowledge and experience around the topic of
business model innovation. The event accompanied the upcoming
release of the Business Model Generation book.
Before writing a single sentence or drawing a single illustration
Osterwalder and Pigneur invited people to co-create the book.
Those who signed up had to pay between $24 (Early Birds) and
$250 (Late Birds). The book was paid for before it was even
written.
The book isnt the traditional academic volume making things
look sophisticated and comprehensive. It is more like a comic
book or an illustrated step-by-step manual.
Compare Osterwalders & Pigneurs Business Model Generation
with books such as Good to Great by Jim Collins, Innovation:
The Five Disciplines for Creating What Customers Want
by Curtis R. Carlson & William W. Wilmot (SRI), The
1
See Visual Meetings by David Sibbet.
Rapid
Propagation
A well thought
out business
model for the
Business Model
A picture tells more
than a 1.000 words
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Balanced Scorecard by Robert S. Kaplan and David P. Norton,
Reengineering the Corporation: A manifesto for Business
Revolution by Michael M. Hammer & James A. Champy, The
7 Habits of Highly Effective People by Steven Covey or Blue
Ocean Strategy by W. Chan Kim & Renee Mauborgne.
All of the books mentioned are famous and promise that a new
approach will provide improvement in corporate and/or personal
performance.
What makes Business Model Generation so different?
The book makes a bold statement on the cover:
Youre holding a handbook for visionaries, game
changers, and challengers striving to defy outmoded
business models and design tomorrows enterprises.
Its a book for the Business Model Generation.
Who wouldnt love to be a member of that group? Game changers?
Yes, here we come.
However, not everyone belongs to this group. Not everyone is a
visionary and/or a game changer. Not everyone is a challenger
striving to defy outmoded business models and design tomorrows
enterprises.
Osterwalder and Pigneur knew that bringing something new to
the market would be met with resistance and ignorance from the
established authorities and the mass market. The law of diffusion
of innovation also applies to innovative business development
concepts.
Osterwalder and Pigneur intelligently
addressed their new approach to the early
market. Targeting the Business Model
Generation framework at technology
enthusiast and visionaries they managed to
stir the interest of the only group who would
be receptive to new ideas.
However they also knew that jumping the
chasm between the early market and the
mainstream market requires momentum.
It is about you rst
and about the model
second
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Thus, the frst couple of pages are flled with names of people
who have made contributions to the book
2
. If you subscribe to
Business Model Generation you will be joining an innovative
community. No need to be sceptical, you are not the frst. With
Business Model Generation you will never have to eat alone.
Today Osterwalder and Pigneurs approach to Business Model
Generation has been widely adopted and is used by people
and companies in the mainstream market. It is by no means
restricted to the game changers and the challengers. Even big
corporations and governments now pay consultants to teach and
tutor partners and startups on the Business Model Generation
concepts.
On page 18-19 you get the full picture and you understand it
immediately.
You get the big picture instantly. Yes, this is a 360-degree
depiction of a business. The small graphical icons support your
immediate understanding and your ability to memorize the
picture.
It takes just 28 pages to describe the 9 building blocks making up
the business model. Each of the pages is rich on graphics and is
segmented into short paragraphs. Compared to the books listed
above we are in a completely different universe.
2
And paid between $24 and $250 to have their name mentioned
Cartoon Format
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Are any of the nine building blocks more important than the
others?
The answer is very simple: No!
Neglecting any one of the nine building blocks may cause your
business model (and thus your business) to suffer or fail.
However, experience shows that the some of the building blocks
are more diffcult to get right than others. The building blocks in
the business models front offce
3
are the most challenging.
The combination of the Market Segments and the Value
Propositions are the most difficult to get right. These two
building blocks define which products/services are very
attractive to which customers AND are better than the
competitive alternatives available to these customers.
Supporting the process of defning and
constantly improving The Market Segments
and the Value Proposition relationship
Alexander Osterwalder has developed the
Value Proposition Canvas.
As a management consultant I can testify
that this is the toughest part for all
companies.
You can run a business with a mediocre value proposition and
blurred market segmentation, but it is impossible to scale and
the P/E
4
relationship will remain lousy.
The Value Proposition Canvas is helpful, but I still fnd the
NABC approach developed by SRI
5
a more mature approach to
the challenge of fnding the right combination of product and
customers.
3
Front-offce building blocks: Customer Segments, Value Propositions,
Channels, Customer Relationships and Revenue Streams.
4
P/E: Price/Earning. A valuation ratio of a company's current share
price compared to its per-share earnings. The term is also used for non
listed companies when making a investment/divestment transaction.
5
Standford Research Institute. Curtis R. Carlson and William W.
Wilmot from The Stanford Research Institute (SRI) published the book
Innovation: The Five Disciplines for Creating What Customers Want.
The book introduced the NABC approach a linear and structured way
to identify and develop what customers want. (NABC is the abbreviation
of Need, Approach, Beneft and Competition.)
The Business
Model Front
Office
Market Segments and
the Value Propositions
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According to Osterwalder the main activities of the Channels
are:
Creating awareness
Helping customers evaluate
Helping customers purchase
Deliver
Providing after sales support
The channels in the B2B software industry can assume just a few
or many more functions
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than those mentioned by Osterwalder.
The word channel is used in the software industry to
describe independent companies that assume various roles and
obligations in bringing a software product to the customers. The
defnition is rather broad, since the roles and obligations can
vary substantially from simple reselling to system integration,
solution development on top of the software, implementation in
terms of consulting, project management, customization, training
and support.
A value chain describes the steps and activities required to fnd,
win and keep happy customers.
Figure 2: Sample Value Chain
6
Alexander Osterwalder is addressing all types of business activities
including government and non-profts. He therefore from time to time
misses out on issues, which are specifc to certain industries and types
of businesses.
Channels
The software industry
channel denition
The value chain
1
2
3
4
5
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All B2B software products have a version of the value chain
illustrated in fg. 2.
The choice of channels has a profound impact on all the other
business model building blocks.
This tight relationship between the choice of channels and the
business model causes most software companies major
headaches.
The solution is to operate with two sets of value propositions:
The customer value proposition(s)
The channel partner value proposition(s)
These value propositions are fundamentally different and
generate completely different demands for the business model
back-offce building blocks.
The roles of the business model back offce building blocks are to
support the execution in the front offce.
The separation of the business model back offce into Key
Activities, Key Resources, Key Partnerships and Cost Structure
is logical and works well.
A well functioning back offce can compensate for a mediocre
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front offce, but you must be a well-established brand to sustain
this imbalance for long.
Keeping the back offce in sync with the front offce is a constant
effort. While you can always work on refning the back offce
from within most of the changes to your front offce are forced
upon you from without.
7
Forces outside your business model may have caused your front
office to slide from excellent to mediocre
The Channels and
the Business Model
The Business
Model Back
Office
2
1
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When we take a close look at the business model canvass we
notice the absence of some signifcant areas impacting our
business.
Where do we deal with the competition, the technology trends,
the legal and environmental issues, the global economy, etc.
etc.?
No business model lives in a vacuum and the toughest part in
business is dealing with the issues that we cannot control.
We have to make it to page 200 in Osterwalder & Pigneurs book
before we are exposed to what they call the business model
environment.
Reading most reviews of the book and listening to consultants
and other supporters of the business model approach indicates
that they apparently never made it to page 200. Most probably
just read the 50 pages that you can download for free from
Osterwalders web site.
Separating what you can control, The Business Model, from
what you cannot control, The Business Model Environment,
is an excellent way of structuring our strategy development
process.
Doing the business model canvas part only is like planning to
put a man on the moon, but ignoring the weather, the earths
gravity, the moons gravity, cosmic radiation, the friction of the
earths atmosphere and probably a lot of other external factors
that I dont even know about. A business model exercise
that skips the analysis of the impact from the business
model environment is at best a complete waste of time
and resources, and at worst is downright hazardous and
dangerous.
To make things even more diffcult we have to consider the
business model environment of tomorrow rather than business
model environment of today.
The business model environment changes continuously. The
The Business
Model
Environment
Separating the
controllable from the
uncontrollable
The Business Model
Environment in the
future
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2
1
4
3
success of our business model is a result of our ability to take
advantage of the business model environment, especially the
changes in the business model environment.
The business model environment is by defnition the
circumstances under which we have to operate. We basically
have two options:
Mitigate the impact of the factors and changes in those
factors that are working against us or are exerting risk
upon us.
Exploit the factors and changes in those factors that
could work to our advantage
Can we change the business environment?
Yes - from time to time business models permanently tweak the
business environment. Microsoft, Google, Apple and Facebook
are examples of companies that have changed the business model
environment for a lot of other companies.
However, just because Apple & Co. did it doesn't mean that you
can/will do it, too!
Most software companies will have to develop and manage their
business model under a given set of business model environment
characteristics. If your business model is so strong and successful
that it changes the entire industry, then that is certainly an
accomplishment that will beneft you tremendously, but dont
count on it at the outset.
The business model environment is divided into four major
areas:
Key Trends
Market Forces
Industry Forces
Macro Economic Forces
Mitigate and exploit
2
1
The Four
Business Model
Environment
Forces
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Osterwalder actually names these areas forces, which in my
opinion may confuse them with Porters Five Forces to which
there is some overlap.
However, Osterwalders four business model environment areas
are fairly comprehensive and complete and will work well for
most software driven companies.
The key trends include:
Technology Trends
Regulatory Trends
Societal & Cultural Trends
Socioeconomic Trends
Most software-driven business models are receive substantial
impact from the Key Trends force. The software driven industry
is also the main technology driver in itself, and aggregated the
industry has more impact on the business model environment
forces than any other industry.
The rapid proliferation of the Internet, the standardization
of digital media formats, the acceptance of smart personal
mobile computers (smart phones and tablets), the invention of
apps and apps ecosystems, the development of the cloud, the
availability of in-memory analytical tools, etc., are technology
drivers disrupting some companies business models while
enabling other companies business models.
The market forces include:
Market Issues x
Market Segments x
Needs & Demands x
Switching Cost x
Revenue Attractiveness x
Although market forces also change over time, the main
consideration here is the nature of your potential customers'
1
Key Trends
2
3
4
Market Forces
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situation, needs and behaviour associated with their purchase
process and decision for your type of product/service.
Key issues to consider are:
Is there a market for your product/service? x
Is your market growing or shrinking? x
Can this market support your growth ambitions x
Are some segments of the market more attractive than x
others?
Do you (in the eyes of the market) offer must have or x
nice to have value?
Is it easy to identify the key decision makers for your x
product/service?
What prevents your potential customers from buying x
your product/service?
What is the switching cost? x
The software industry is probably the greatest innovation engine
the world has ever seen. New solutions to existing problems and
new opportunities for completely new markets pop up every
day. Although the business model innovation approach helps us
analyze and optimize our business model it hasn't eliminated
gravity.
We still have to face the law of diffusion of innovation.
We still have to cross the chasms.
The industry forces include:
Competitors (incumbents) x
New Entrants (insurgents) x
Substitute Products & Services x
Stakeholders x
Suppliers & other value chain actors x
Managing your business model without an eye on your
customers alternatives seems hazardous. You should not ignore
your competitors, but you can choose to ignore the moves of your
competitors, if you see no threat to your business.
Very low barriers to entry characterize the software industry.
Industry Forces
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Starting a software business requires very little capital. Thus,
the software industry is crowded with incumbents and insurgents
in all segments. Thats not necessarily a negative thing. Having
someone helping you make a market can lower your cost of sales
considerably.
Stakeholders are people in organizations that have infuence
on your business model without being customers. Stakeholders
are typically your staff, labour unions, shareholders, industry
associations, the government, lobbyist, consultants, analysts and
the press.
The macro economic forces include:
Global Market Conditions
Capital Markets
Commodities and Other Resources
Economic Infrastructure
The macro economic forces affect big companies, although smaller
companies are less affected directly. As the software industry is
made up of primarily small companies, and as software is mostly
boosting productivity, the software industry is often unaffected
by the macro economic forces.
Osterwalder and Pigneur make another important yet often
ignored observation: No individual alone in your organization
could paint a holistic picture of your business models
environment and design space. Only by mapping out each
specialists knowledge can you develop a shared understanding
of your environment.
Although there is nothing in the business model and business
model environment approach that prevents us from keeping
the strategy considerations in the board room, Osterwalder and
Macro Economic
Forces
1
2
3
4
Managing the
business model
environment
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Pigneur are passionate believers in inclusion. They recommend
drawing on the insight already residing in the organization and
bringing this knowledge into play as we review and refne our
business models.
About the same time as the book hit the
streets the people behind Business Model
Generation launched a business model
simulation tool for the iPad.
The App is a very nice graphical
representation of the Business Model
Canvas allowing you to add sticky notes
and to perform P&L simulations. It
is also a tutorial, as it will provide you with explanations and
suggestions in each of the 9 building blocks.
Soon after the release of the App a web based Business Model
simulation tool was also released. The web version supports
collaborative sharing and working on business models.
The Business Model Generation concepts are freeware.
Anybody can copy and use them. The Business Model Foundry
(Osterwalders and Pigneurs company) make money on selling
Apps, subscriptions to the web version, training and consulting.
Osterwalder, especially, travels the world on invitations from
enterprises and governments to introduce his Business Model
Canvas and concepts and to help develop business models for
individual clients.
An army of smaller consulting frms have adopted the approach
(it is freeware!) and provide consulting in all forms and shapes
around Business Model Generation.
An App
for the iPad
How do they
make money?
Surprisingly for many, Osterwalder characterize his company as
a software business. He does not want to build a consulting
company, but rather a software company providing all the
external and internal consultants with smart tools facilitating
the modelling process.
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No, we will not claim that
Business Model Generation
is an illusion.
Business Model Generation
certainly is a genuine and
solid approach to map,
simulate and develop a
business idea or an existing
business.
However, we will claim that
is not what most people
expect or hope it is.
Just because it looks easy doesnt mean it is easy.
We have assisted in several Business Model Generation projects
and our clients have all been surprised (some even overwhelmed)
by the number of iterations required to start and sustain a
Business Model Generation process.
Most companies still subscribe to this approach:
Lets do something and see what happens.
The implications of this approach are described in depth by Eric
Reis in his book The Lean Startup
1
.
You will always see what happens. However, it may not be
what you expected or hoped to see and you may not have
learned anything from the experiment. You are most likely left
in a situation where you dont know what to fx to improve the
outcome.
People still keep talking about the low hanging fruit. A
metaphor, which has lost its relationship with reality
2
. Most
people are looking for ways to achieve fast and monstrous results
by doing very little. Conceptually a sensible and meaningful
1
Eric Ries, The Lean Startup, September 2011
2
Todays orchards have straight trees ensuring equal amounts of
sunlight and making all the fruit easily accessible for picking.
Reality Distortion Field
Is Business
Model
Generation the
Emperors new
clothes?
The quick x and the
low hanging fruit
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approach, in reality completely useless, because there are no
low hanging fruit. And if there were, someone else took them
yesterday.
People looking for the low hanging fruit go to bed hungry. The
competition for the low hanging fruit is gigantic.
Expecting that the Business Model Generation is a short cut to
fxing problems fast and generating proft instantly is a common
misconception. And this comes as a big surprise to many.
The book is (especially the frst 50 pages) almost self-explanatory,
which leads people to conclude that Business Model Generation
is a walk in the park. A little introduction and couple of -day
workshops and we are home free. You call in a management
consultant to help you and within a week or two your business
model is rock solid.
Business Model Generation is a tool for prototyping. It is a way
to try out many different ideas before committing too many
resources to a test that will fail. Failure is an integrated element
of prototyping. Most early models will fail. That's exactly why
we prototype. Failing is learning. Our frst business models are
based on assumptions and guesses. As they fail, we will learn
something that we incorporate in our next iteration.
The number of iterations and the time required to develop a
business model that works is unpredictable. In this respect
Business Model Generation is no different from other innovation
approaches. The three biggest advantages of Business Model
The water may look
at, but....
Business Model
Generation is not a
shortcut
Prototyping
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Generation are:
It deals with the entire business model and not x
only the product/service
It keeps down the cost of experimentation x
It organises the learning curve x
A business model is a blue print we use for testing against
reality. The philosophy behind Business Model Generation says
that there is no need to test a business model that doesn't even
work on paper. Let's keep prototyping until it works on paper,
then let's go and test versus reality.
The best illustration of how to use Business Model Generation
can be found in Steve Blanks book The Startup Owners
Manual
3
.
Dont think this book is not for you.
A startup company or startup is a company or
temporary organization designed to search for a
repeatable and scalable business model
4
Many companies are dragging along for years with business
models that they can neither repeat nor scale. Survival is a tough
daily fght to make ends meet and the business cannot generate
enough proft to invest in growth.
Steve Blank provides the prescription for getting out of this
quagmire. Business Model Generation is an integrated tool in
his approach together with his renowned Customer Development
approach.
Steve Blank adopts the Business Model Canvas as the graphic
representation and simulation model for your current state and
your next assumption.
As you move forward and test new approaches you constantly
update your business model.
Business Model Generation is not a one-time effort. It is an on-
3
Steve Blank, The Startup Owners Manual, by Steve Blank and Bob
Dorf, March 2012
4
http://steveblank.com/2012/03/05/search-versus-execute/
Not a one night stand
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going exercise and process. You are mapping the waters as you
sail them. You keep testing and adjusting your business model
until it works or until you abandon it, pivot and try a different
route.
Steve Blank argues that you cannot delegate your Business
Model Generation to a management consultant. You have to dig
in yourself.
Although we are management consultants we agree with Steve
Blank.
As management consultants we can help facilitate the process
and we can play the devils advocate to your assumptions and
interpretation of your experiments, but we cannot make the
models for you.
Bringing all the people involved in a certain business problem/
challenge together to review the issues and develop potential
solutions is by no means a new concept.
Coming from Scandinavia with the shortest power distances in
the world we have to involve people in the problem defnition as
well as in the solution identifcation. Otherwise nothing will be
accomplished.
There are other cultures where a hierarchical top down approach
still reign and where problem defnition as well as the solution
identifcation is undertaken at the executive level, then passed
on to the operative level for execution.
If you want a recent update on the power of involvement you
should read Karen Phelans new book: Im Sorry I Broke Your
Company When Management Consultants are the Problem,
Not the Solution.
Im Sorry is also not the traditional academic thesis based
on years of research which characterize most management
literature. The book is based on Karens personal experience, her
common sense and some secondary source research. The book
Management
Consultants and
Business Model
Generation
Involvement
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has several illustrative examples from Karens own praxis and
also refers to other cases, which have reached the public domain.
It is a refreshing and convincing explanation of the power of
involvement.
We believe that the combination of the 9 building blocks of the
Business Model Canvas from Osterwalder & Company, the
application of visual facilitation as promoted by David Sibbet
and the power of involvement as expressed by Karen Phelan
hold tremendous potential for the development and execution of
meaningful and proftable business models.
The combination of the three approaches (and executed the Steve
Blank way) may be the best approach available to companies in
todays rapidly changing environment where technology offers so
many opportunities for new value creation.
Combining the three approaches has no relationship with quick
fxes and low hanging fruit. Rather it is a structured framework
to maintain a persistent and steady course and gradually
approach a business that is valuable for many customers and
proftable for the owners.
Our conclusion
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Hans Peter Bech
Hans Peter Bech is a software industry growth consultant; he
has more than 30 years of operational experience with global
business development in the software industry.
His experience includes all types of software from high priced
enterprise management solutions to low price/high volume
software sold over the Internet and/or through telesales.
Hans Peter has been exercising all Go-to-Market variations such
a direct enterprise sales into foreign markets, indirect through
resellers and distributors, through own subsidiaries, through
franchises and through acquisitions.
Hans Peter is the author of several whitepapers on software
business development and Business Model Management in the
software industry. He frequently writes articles on the subject.
He started his career as a management consultant in 2003
and founded TBK Consult in 2007. Since then he has built the
company to its present position with 24 senior consultants in 16
countries.
Hans Peter oversees the development of TBK Consult as well
as performing management consulting assignments for selected
clients.
Hans Peter holds an M.A. in macroeconomics and political science
from the University of Copenhagen. He speaks Danish, English
and German and is a certifed ValuePerform, ValuePartner and
Business Model Generation consultant.
More about Hans Peter Bech
TBK-WIPA-007